Uncertainties from Ukraine crisis hang over eurozone economy, but recovery holding up for now

Aug 5, 2014
Pan Pylas, The Associated Press

LONDON – Further evidence emerged Tuesday that the economic recovery across Europe is gaining traction, though it remains vulnerable to an escalation in the crisis in Ukraine, which has seen sanctions on Russia ratcheted up.

As well as raising speculation that Russia will slip into recession following the sanctions imposed by the United States and the European Union, the crisis in Ukraine has clouded the economic outlook for Europe as a whole.

The sanctions, which were imposed because of Russia’s alleged support for Ukrainian separatists, could have an impact on European businesses that have ties with the country’s financial, military and energy sectors. Even those that don’t have direct links to those sanctioned sectors are cautioning over the outlook — German sportswear company Adidas, for example, has expressed worries over the impact on its business.

So far, European companies appear to be bearing up, though analysts fear it won’t take much of an increase in tensions between the West and Russia to start crimping the recovery.

Financial information company Markit said Tuesday its purchasing managers’ index — a key survey of business activity — for the 18-country eurozone rose a point to a three-month high of 53.8 in July. However, it warned of a “growing anxiety” among businesses.

“At the moment, the effects seem to be limited to weaker growth of demand at exporting manufacturers, but any further escalation of the crisis could further subdue the overall pace of economic growth in coming months,” said Chris Williamson, Markit’s chief economist.

Having emerged from its longest-ever recession a little over a year ago as the European debt crisis abated, growth in the eurozone has been paltry. Markit’s July survey points to a quarterly growth rate of 0.4 per cent, which equates to an annualized tick of 1.6 per cent —anything above 50 in Markit’s survey points to expansion. Though higher than at any time since the recession ended in the second quarter of 2013, the eurozone economy is still lagging its major competitors, notably the United States.

The growth rate is so subdued that the European Central Bank has continued to ease its monetary policy and has even laid out the prospect of enacting a monetary stimulus similar to those pursued by the U.S. Federal Reserve.

By cutting interest rates further, the ECB is hoping not only to shore up the recovery but also to get inflation up from super-low levels — in the year to July, annual consumer prices rose by only 0.4 per cent, well below the official target of just below 2 per cent.

The ECB meets next on Thursday and few economists think it will change policy, especially as the euro has fallen sharply over the past two months in light of the stimulus hints from a raft of officials, including the bank’s president, Mario Draghi.

The Markit survey, in isolation, will also provide some comfort to ECB policymakers as they sit down for their monthly meeting, not least because it is pointing to a relatively strong rebound in countries like Spain, which was one of the countries most afflicted by the debt crisis of recent years. Growth, it appears, is not just confined to the powerhouse that is Germany.

Some encouragement could also be gleaned from the fact that retail sales across the eurozone, according to the EU’s statistics office, Eurostat, grew by a monthly 0.4 per cent in June. That was the third straight rise and took the annual rate of increase to 2.4 per cent, its highest level in over seven years.

Whether the improvement in retail sales lasts through the summer could hinge on developments in Ukraine.

“The continued political crisis between Ukraine and Russia is clouding the outlook for the single currency region,” said Anna Zabrodzka, economist at Moody’s Analytics.

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